Kraft General Foods, Inc. v. Iowa Department of Revenue & Finance

Background

A large national food company (Kraft) operated throughout the United States and in several foreign countries and received dividends from six subsidiaries incorporated and doing business abroad. Iowa included those foreign-subsidiary dividends in the state tax base while excluding dividends from domestic subsidiaries. Kraft challenged the difference in treatment as a violation of the Constitution’s protection for foreign commerce.

Reasoning

The central question was whether Iowa’s rule facially discriminated against foreign commerce. The Court noted the parties’ stipulation that the foreign subsidiaries did operate in foreign commerce and that the dividend payments reflected a flow of value across national borders. The majority concluded that Iowa’s approach treated foreign-source dividends less favorably and that administrative convenience did not justify a rule that facially discriminates when reasonable nondiscriminatory alternatives exist. The Court therefore held the Iowa statute violated the Foreign Commerce Clause and reversed the Iowa Supreme Court’s judgment.

Real world impact

The ruling prevents Iowa from enforcing the challenged tax treatment of foreign-subsidiary dividends as written. Multinational companies receiving dividends from foreign affiliates benefit immediately from the decision. The opinion also signals that other States that follow federal tax definitions must adjust their rules to avoid discriminating against foreign commerce and to prevent possible international complications.

Dissents or concurrances

Chief Justice Rehnquist (joined by Justice Blackmun) dissented, arguing the heavy burden of a facial challenge, lack of record evidence showing systematic discrimination, and that administrative efficiency and rational classification would justify upholding the Iowa tax and rejecting an equal protection challenge.